Banks to Review Mis-sold Swaps to SMEs

The Financial Services Authority (FSA) has ordered Britain’s "big four" high street banks to review the mis-selling of interest rate swaps to small businesses.

Interest rate swaps are hedging products that are supposed to "protect" their buyers from rising interest rates.

Officially they are termed Interest Rate Hedging Products (IRHPs)

These interest rate swaps were sold to UK small businesses and the historically low interest rate remained low.

Additionally, some small businesses were advised by their banks to take out these hedging products as a pre-condition for receiving any business loans.

In reallity, many small firms were mis-sold products that were not only larger but also lasted many years longer than the products they were hedged against.

The FSA investigated the mis-sold IRHPs in its own review last year and found that of the 173 sales of such products last year 90% were in breach of regulations.

Amongst the problems, the FSA found that the banks were guilty of a number of poor practices including failing to inform the businesses of the high penalty costs of cancelling to get out of the schemes and focusing on the benefit to the banks as opposed to the customer.

The FSA has ordered Barclays, HSBC and the part taxpayer-owned Lloyds and Royal Bank of Scotland (RBS) to identify and redress all customers affected. Affected small businesse will not have to seek the involvement of any financial advisers.

Other Banks Involved

The FSA wants five other banks to launch their own reviews before the 14th of February.

The other five banks include Allied Irish Bank (AIB), Bank of Ireland, Clydesdale & Yorkshire Bank, The Co-operative Bank and Spanish bank Santander (Who are considering a £2billion move for Clydesdale & Yorkshire Bank)

Martin Wheatley, CEO of the Financial Conduct Authority, which takes over from the FSA later this year, said that some of the products sold to small businesses were "absurdly complicated".

Speaking with BBC, he added that

“Where redress is due, businesses will be put back into the position they should have been without the mis-sale.”

Last year, when Wheatley was the Managing Director of the FSA’s business conduct unit, he said that many of the firms had siffered financial distress because of the mis-selling. In some cases, some of the small businesses had actually gone out of business.

Phil Orford, the Chief Executive of the Forum of Private Business (FPB) was particularly scathing, saying:

“It is fair to say that in the last few years banks have been no friend of small business, falling well short of the scale of lending needed to support SME growth. Yet these new findings show their role as a trusted adviser – let alone a lender – has never been in such a worse state. This is another epic fail by the banks, but one they must put right – and quickly too!”

Phil Orford added:

“It is more important than ever that Government drives through change in our banks and sees them focus on customer support and lending, not aggressive sales machines.”

The compensation for some of the small businesses could reach as much as £100,000

Related Articles

See is4profit’s original coverage of this story in last year’s Banks Compensate SMEs for Mis-sold “swaps” Policies.

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